to improve the purchasing power and saving capacity of the middle class and to ease the acute housing shortage through special incentives and programs. While talking about these reforms, he used the word “ortadirek ” to refer to the middle class, a term meaning the “core structure, pole or pillar” of a tent, as a rhetorical device to signal an intention to restore the economic base and social welfare of the middle class following the 1979 crisis.
In line with this rhetoric and in keeping with this program, Özal's government declared a “war” on inflation as the primary animus of its multipronged program. He promised to reduce the inflation rate in an effort to stop the erosion of middle-class purchasing power and savings. Once the inflation rate was reduced, middle-class incomes would rise and income distribution would equalize, favoring this class.
To achieve this goal, the government reasoned, it would be necessary to liberalize interest rates. As interest rates went up, the middle class would put lifetime savings into time deposit bank accounts, creating a tool for increasing income. Increased savings would reduce consumption and therefore inflation. Upper middle-class families that were losing real income due to the high inflation rate by the end of the 1970s received this policy warmly as well.
Prior to this era, savings accounts were not very common among middle-class households because of negative real interest rates on time deposit accounts. Middle-class families kept their savings in the form of gold or real estate. At first, interest rate liberalization resulted in a fierce struggle among banks and broker institutions to attract funds from the public, mainly middle-class households. Unfortunately, this option was short lived due to a banking crisis in 1982. Kastelli, the largest broker, became insolvent and fled the country, leaving long lines in front of his brokerage houses. Middle-class people who had sold their houses or gold and deposited the proceeds with the bankers were the main losers. Although it is not known how many households lost their savings in this episode, it is clear that this first encounter with unregulated global capitalist markets was a disaster for the middle class, the supposed beneficiaries of the new policy. Following these failures, the government returned to its policy of regulating deposit rates, but in 1987, it liberalized interest rates again and banks were allowed to determine rates for their deposits. Once again middle-class families began to keep their savings in the form of high-interest deposit accounts in order to stretch their continuously shrinking incomes due to inflation.
The distribution and size of deposits revealed the winners of this policy.4 The overall effect was to increase the rent income of a very small number of deposit holders. Those who had substantial savings, like the capitalists and upper middle-class families, were able to increase their income through interest earnings. But for the vast majority, things only got worse. The majority of core middle-class families lost their purchasing power as a result of interest rate manipulation.5
The failed promise of improving the income of the vast majority of middle-class families had the effect of placing them at greater risk with an increasingly uncertain future. Economic uncertainty, though, was not the only concern. In the old system, the middle-class families had a respected status in Turkish society. Their social worth seemed to be assured. Now it was being undermined.
One other form of state redistribution of income was implemented through public borrowing, by transferring income to holders of public debt instruments (mainly the rentiers and the financial sector) through interest payments. Persistent and high inflation had created incentives for the private sector to delay tax and social security payments. The system encouraged evasion. Firms withheld these payments and invested them in government bonds earning high profits because the return on government bonds was far greater than the penalty they paid for being behind in their payments.
Meanwhile, tax policies favoring capital and punishing labor were continued. There was a shift from an earlier progressive income tax to an almost regressive one, favoring dividend and interest income on government bonds and treasury bills and increasing the tax burden on wage and salary earners. In addition, capital gains on real estate and financial assets were all exempted from taxation. These exemptions allowed an avenue of rapid accumulation for the new middle class who invested in the urban real estate boom, especially in Istanbul. Intellectual-property incomes and interest revenues on bank deposits were taxed at flat rates much lower than the lowest tax bracket applicable to wages and salaries.6
Financialization and the Istanbul Stock Exchange
The Istanbul Stock Exchange (ISE) was initiated in 1986 and a Capital Market Board was established in order to regulate and supervise the capital market. The removal of all restrictions on capital flows completed the financial liberalization program. An important characteristic of this final phase of liberalization was the massive flow of short-term speculative capital in response to fluctuations in exchange rates and interest rates. There were three sources of hot-money movements that dominated the capital account and led to external debt growth during this period: rentiers, firms, and banks. Rentiers engaged in currency switching, mostly between dollar and Turkish Lira (TL) assets, capital flight, and its reversal. Firms shifted between borrowing in TL and foreign currency. Banks borrowed abroad and lent domestically. In 1993, the Turkish stock market was considered to be one of the best-performing emerging stock markets in the world.
Growth in the financial sector is one of the clearest indications not only of higher incomes but also of the prospect for wealth that is one of the characteristics of the new middle class. Financial markets, including operations of the ISE, were the source of many new occupations as well as investment opportunities sought by the new middle class.
A series of reforms were undertaken in Turkey's capital markets that clearly advantaged this emerging new middle class. An interbank money market law was enacted in 1986. Significant tax incentives were conferred on the financial sector to encourage equity financing. This policy benefited the new middle class at a time when core middle-class wage and salary earners already were carrying a disproportionate share of taxes. Also, the creation of the credit card industry enhanced the economic power and stature of the new middle class by enabling increased consumption.
In 1994, the government's attempts to reduce interest rates resulted in a massive outflow of short-term capital, necessitating a 65 percent devaluation of the Turkish lira. The financial crisis was, in part, a result of deteriorating macroeconomic fundamentals that were rooted in public sector imbalances. Important consequences of the currency crisis were the decimation of middle-class savings due to devaluation and high inflation, and the worsening of income distribution.
The currency crisis led to the implementation of an austerity program in April 1994. Fiscal “belt tightening” had the aim of restoring confidence in the domestic currency, reducing fiscal and external imbalances through cutbacks in government social spending, and forcing a slowdown of inflation. These structural adjustments had their effect on realignments within middle-class fragments that reflected a global shift in wealth, power, and privilege. The new middle class diverged from the core middle class, resembling a capitalist class more and more, while the core middle class, in turn, began to resemble the lower middle and upper working classes. Social bifurcation within the middle class continued during the postcrisis years.
Privatization and Commodification
The privatization of public assets has been an important feature of neoliberalism. In both industrialized and developing countries, state enterprises and banks, public utilities of all kinds (water, telecommunications, transportation), social welfare provisions (social housing, education, health care, pensions), public institutions (for example universities), and public land have been privatized to some degree.
Under neoliberalism, Turkey had its share of privatization as well. Privatization implementations gained momentum in 1986, and since then 193 companies have been privatized. Currently, the state does not have any ownership in 184 of these companies. The state completely withdrew from the cement, animal feed production, dairy
